U.S. Consumer Spending Momentum: Navigating Retail Resilience and Cyclical Opportunities

The U.S. consumer remains a cornerstone of economic resilience, even as macroeconomic headwinds persist. In Q2 2025, real GDP growth of 3.0% was fueled by robust consumer spending, which offset declines in investment and exports. While inflationary pressures have moderated—PCE price growth fell to 2.1% from 3.7% in Q1—the broader picture reveals a nuanced interplay of sustainability and vulnerability. For investors, the challenge lies in discerning which segments of the retail and cyclical sectors are poised to thrive amid shifting dynamics.

Assessing the Sustainability of Retail Sales Growth

Retail sales growth in 2025 has been a mixed bag. On one hand, services and nondurable goods spending have outpaced durables, driven by health care, food services, and financial services. On the other, retail leasing volume in Q2 2025 plummeted to 31.7 million square feet, a 29% year-over-year decline, as retailers grappled with tariff uncertainty and a tightening supply of prime retail space. Store closures outpaced new leases, pushing net absorption into negative territory. Yet, this contraction is not a harbinger of collapse but a recalibration.

The retail sector is adapting to a new normal: streamlined store footprints, supply chain resilience, and a focus on value-oriented strategies. For instance, freestanding retail and power centers maintain above-average occupancy rates, while community and strip centers hover near 93.5%. Meanwhile, malls and lifestyle centers continue to struggle, underscoring the need for innovation in traditional retail formats.

Cyclical Sectors: Resilience Amid Diversification Risks

Cyclical sectors in Q2 2025 exhibited divergent performances. The Consumer Discretionary sector rebounded sharply, buoyed by strong job growth and low interest rates, while the Energy sector faltered due to cooling oil prices. The Technology sector, though not a traditional cyclical, outperformed with a 23% gain, driven by AI infrastructure demand. This divergence highlights the importance of sector-specific tailwinds and risks.

Trade policy uncertainty, particularly around tariffs on key inputs like steel and aluminum, remains a wildcard. For example, the Industrials sector faces long-term headwinds from potential input cost inflation, while Financials remain sensitive to interest rate fluctuations. Investors must balance exposure to high-growth areas (e.g., AI-driven tech) with caution in sectors vulnerable to trade shocks.

Undervalued Cyclical Stocks: Opportunities in Resilience

Morningstar's 2025 list of undervalued consumer cyclical stocks offers a roadmap for investors seeking long-term value. These firms are positioned to benefit from sustained consumer spending and sector-specific tailwinds:

1. Hanesbrands (HBI): Trading at 70% below its fair value estimate of $16.30, Hanesbrands is restructuring to focus on core segments and reduce tariff exposure. Its Central American manufacturing footprint and brand portfolio (e.g., Champion) position it to capitalize on durable goods demand.
2. Adient (ADNT): At a 66% discount to its $64 fair value, Adient is leveraging its 33% global automotive seating market share to adapt to electric and autonomous vehicle trends. Debt reduction and operational efficiency improvements are key catalysts.
3. CarMax (KMX): Undervalued by 54%, CarMax's omnichannel strategy and finance arm profitability make it a standout in the auto dealership sector. Its customer-centric model differentiates it in a competitive market.
4. Yum China (YUMC): Trading at a 41% discount, Yum China is expanding into lower-tier cities and converting underperforming units to lower-price formats, aligning with rising disposable incomes and quick-service demand.

Strategic Implications for Investors

The U.S. consumer's resilience is underpinned by wage growth outpacing inflation and a shift toward services and nondurables. However, sustainability hinges on mitigating risks such as tariff volatility and interest rate sensitivity. For cyclical sectors, diversification remains critical. While Consumer Discretionary and Technology offer growth potential, sectors like Energy and Industrials require careful monitoring of global commodity trends and trade policy shifts.

Investors should prioritize companies with strong brand equity, operational flexibility, and exposure to secular trends (e.g., AI, e-commerce). The undervalued stocks highlighted above exemplify this approach, combining strategic repositioning with long-term growth prospects. As the retail and cyclical sectors navigate a transitional phase, a disciplined, data-driven strategy will be essential to capitalize on the opportunities ahead.

In conclusion, the U.S. consumer-driven economy remains a powerful engine, but its trajectory will be shaped by both macroeconomic forces and corporate adaptability. By focusing on sustainability, diversification, and undervalued opportunities, investors can position themselves to thrive in an evolving landscape.